Why do big claims fail?

It goes without saying that the insurance policy is a very important document.  Initiatives have continued through the last decade to make that insurance contract more robust.  Initially, this effort focused on achievement of contract certainty resulting in the issuance of the insurance policy at the time of inception of coverage.

However, insurance buyers remain concerned whether the insurance contract will provide them with the coverage they require.  After all, the insurance contract is often an arrangement worth tens or even hundreds of millions of pounds.  I remember, as the insurance buyer for a large diverse group of companies, a major fire at one of the group locations.  The finance director made the statement to me: "I don't know much about insurance but I do know that it restores you to the position that you would have been in if the incident had not occurred".

I tried to explain that the level of claims certainty he anticipated was not necessarily guaranteed. This type of experience, together with the Law Commission proposals to reform insurance contract law and the Airmic initiative on Reservation of Rights, has led us to seek more information on the main reasons why insurance contracts fail.

My colleague, Georgina Wainwright, had a series of conversations with senior claims directors from the large insurance brokers in order to gain a better understanding of why insurance claims do not pay out such that the expectations of my former group finance director would be fully met. The following are the five main reasons that were given:

1. the underwriting presentation was not appropriate in that there was a failure to disclose material facts and/or the market presentation was not a fair representation of the risk;
2. breach of often very simple warranties had taken place, leading to the loss or resulting in it being more serious than anticipated. Common examples included sprinkler systems not fully operational and doors not locked as required;
3. there was an inadequate level of insurance purchased - this was particularly common in relation to business interruption;
4. late notification of claims to excess-layer insurers was a key shortcoming for large corporate buyers in most classes, whilst in liability there was also a failure to notify primary insurers in good time.
5. a more challenging approach is being adopted by insurers to the handling of claims. This has resulted, for example, in the more frequent use of reservation of rights letters.

The lessons for insurance buyers and risk managers are clear.  Achieving contract certainty is not an end in itself.  The insurance buyer needs to be sure that the policy provides the coverage that is required and that the remedies for any non-disclosure, underinsurance and/or breach of warranty are clearly established in the policy or in separate agreed claims handling procedures.

The senior claims directors from the insurance brokers all recommend that insurance buyers have clearly established claims procedures to ensure that there is good communications throughout the claims handling process.  This will lead to the best achievable outcome for the insurance buyer.  Scenario testing can be an important part of preparing for the large claim.

Airmic will continue with high-profile initiatives to ensure that insurance policies perform in a satisfactory manner.  Contract certainty to ensure that the insurance buyer has the policy delivered in a timely manner is now a given.  Insurance buyers also need to ensure coverage certainty, and it may be appropriate to have the insurance policy reviewed by the legal department and/or legal advisers. The ultimate test of an insurance policy is that it delivers claims certainty. Airmic will continue its efforts to support insurance buyers in fulfilling their responsibility to ensure that the cover purchased restores their employer to the position they would have been in if the loss had not occurred.